Posted by: Josh Lehner | September 13, 2018

Urban Oregon Household Income, 2017 Update

This morning the Census Bureau released the 2017 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

As discussed earlier, Oregon incomes continued to rise and the poverty rate ticked down. This post is a quick update on trends we are seeing across Oregon’s metro areas. For rural income trends, we need to wait until December when the 5 year ACS estimates are released.

First, let’s start with the Rogue Valley where household incomes have seemingly lagged underlying economic growth in recent years. The latest figures show solid gains in both Medford (Jackson County) and Grants Pass (Josephine County). The data is a bit noisy so I usually use a two year average to help smooth it and get the underlying trends. This is especially useful for a smaller area, and thus smaller sample size, like Grants Pass. As you can see in the dotted line (annual numbers) the region has seen two strong gains in the past three years, but also a year of large losses. Expectations are that moving forward, there will be more sustained momentum in the Josephine numbers and incomes will continue to increase. That said, some year to year volatility is to be expected. Medford

Traveling north on I-5 a bit, incomes throughout the Willamette Valley continue to show good growth in the latest data. Salem and Corvallis incomes are now at historic highs, while Albany and Eugene incomes are essentially back to where they were at the start of the Great Recession.

Further north, the Portland region continues to see strong gains. Like the state overall, 2017 increases were a bit slower, but continue to outpace most other large metros across the country. The Portland MSA’s median household income now ranks 16th highest among the nation’s 100 largest metros. In 2007, Portland ranked 32nd highest. As noted in the statewide trends, the leveling out of the poverty rate was also seen in the Portland region. Similarly, the poverty rate differences between racial and ethinic groups was evident in Portland as well. As such, it is reasonable to conclude that outside the Portland area, Oregon’s poverty rates continued to decline.

Finally, let’s cross the mountains and check in on Bend where we know growth has been and continues to be robust. Household income in Deschutes County saw another strong year in 2017 and compared with the other housing bust metros across the country, Bend continues to outperform. Among these 50 metros, Bend’s income growth since the onset of the recession ranks 5th best. Medford, which is also among the worst housing bust metros nationwide, ranks 15th best.

Posted by: Josh Lehner | September 13, 2018

Oregon Poverty and Progress, 2017 Edition

This morning the Census Bureau released the 2017 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

As expected, the latest Census data shows that Oregon’s economy continues to get better. Major economic markers like median household income and the poverty rate are showing ongoing improvements. That said, 2017’s gains are a bit slower than those seen in 2015 and 2016. This is in-line with what we’ve seen in the real-time data like withholdings out of Oregonian paychecks and the monthly job numbers. Oregon’s economic expansion is transitioning down from those peak growth rates a couple years ago to something more sustainable, and eventually something closer to growth in the working-age population. As such, Oregon’s gains in 2017 were essentially in-line with nationwide improvements instead of outpacing nearly all other states like we did a couple years ago. And as we will get to in a minute, there is one potentially worrisome sign that will require a big more digging to figure out what exactly is going on.

First, let’s take a look at historic trends in median household incomes here in Oregon and across the country. In terms of how the typical Oregon household stacks up to the U.S. this is our office’s preferred measure — not per capita personal income. The good news is that the improvements seen in the past few years are sizable. Oregonian incomes today are at their historic high — at least when using PCE as the deflator — and just like last year, they have essentially caught up to national incomes, which is something we haven’t seen since the mills closed in the 1980s.

In looking at the major drivers of median household income in Oregon last year, they are a bit more of a mixed bag than a year ago. The good news is the economy continues to employ more Oregonians and more importantly, even more Oregonians on a full-time basis. This is the major driver of the household income gains. And this is exactly what we want to see. That said, earnings for full-time workers increased by about $1,000 which was just 2.1%. Overall, the nominal increase of 4.7% household income growth is solid, and in-line with the national increase.

The one worrisome spot is that the bottom 20% of households did not see income gains last years. The top 80% of households did see gains and the improvements were strongest in Oregon for the second and third quintiles — those in the $25,000 to $74,000 range. However, incomes for the lowest quintile took a step back back in nominal and real terms. This feeds directly into the poverty rate numbers we will discuss in just a minute. But first, this decline in incomes for the lowest quintile is a surprise. This quintile had seen the strongest gains in recent years — driven by the labor market. The question is whether or not it is a real decline, or potentially just noise in the data. It is also possible that it is driven by stronger household formation, in addition to age-specific household formation, which would or could alter the overall distribution. For now that is my hunch, but I do not know for sure and we will need to wait for the microdata here in another month or so to dig into it.

When we see that incomes for the lowest quintile of Oregonians did not improve, then it should come as no surprise that Oregon’s poverty rate did not improve significantly over the past year either. Now, the rate did tick down from 13.3% in 2016 to 13.2% in 2017 which is still progress, just maybe not as much as one would have expected given all the other available data. That said, this marks the lowest Oregon poverty rate since 2007 when it was 12.9%. The last time Oregon saw sustained rates this low was in the 1990s, although we have a ways to go to reach those figures.

In decomposing the poverty rates just a little it shows a couple of things. First, we are seeing ongoing improvements in the poverty rate itself, but also for those in deep poverty (less than 50% of the poverty threshold) and those doing just a little bit better than the threshold. But we are seeing significant improvements among our communities of color, while poverty rate figures for whites held steady last year. The biggest improvements, particularly among those in deep poverty were seen among Oregonians identifying as black or Hispanic or Latino. Now, poverty rates remain significantly higher for our communities of color than they do for whites, but for the first time this gap narrowed just a bit.

Bottom Line: Oregon continues to be in the feel-good part of the business cycle. That said, as we return to roughly the same vantage point as prior to the Great Recession, progress moving forward may be harder to come by. The cyclical improvements are essentially complete — incomes back up, poverty rates back down, as is unemployment — so further progress will be about fundamental gains and improvements, not just about returning to the status quo, which for many Oregonians and Americans wasn’t that great even a decade ago. As I tend to say in presentations, in the big picture, Oregon is now doing better than during the housing boom, but we have further to go to reach the better days seen in the late 1970s and late 1990s.

Coming up this afternoon will be a high level look at household income trends in Oregon’s metro areas.

Posted by: Josh Lehner | September 10, 2018

PSA: New Census Data, Put Your Hands Up!

It’s that time of year again where we get new Census data! This week we will get 2017 snapshots of income, poverty, household formation and the like. First up will be the Current Population Survey estimates, followed a day later by the American Community Survey. Here’s how I will be celebrating this week. True story.

It’s important to keep in mind that all of these data are backward looking. They tell us how things changed a year ago. That said they are very important markers that track socio-economic progress. In advance of the new data, I thought I would lay out a few expectations of what we think the data will, or should show. These are largely a continuation of the trends seen in recent years. The big picture should show continued improvements across a broad range of metrics including by region, by quintile, by age, by race or ethnicity and the like.

  • Household incomes rising across the board and the poverty rate taking another step down. That said, median household income unlikely to rise quite as much as the past couple of years (6-7% not adjusting for inflation). The underlying dynamics will be what I’m watching for. The change in the number of households, number of workers, number of full-time workers, and changes in wages. All of those drive overall household income trends.
  • Depending upon which inflation measure you use, inflation-adjusted income gains are likely to be less. Headline inflation (CPI or PCE) was 0.9% or 0.7% faster in 2017 than in 2016. If you use core inflation — excluding food and energy prices — the results will be more stable.
  • Regional income differences in Oregon. The Willamette Valley and Bend should see ongoing gains and we should finally see a pop in the Rogue Valley numbers where household incomes have lagged underlying economic growth. There is an outside chance all of our metro areas’ median household incomes will be above their pre-recession readings on an inflation-adjusted basis, except for Grants Pass. Portland and Salem are already there. Bend, Corvallis, and Eugene are close. Albany and Medford are within striking distance.

Additional housing-related items I will be watching include homeownership rates by age group, household formation by age group, changes in the local distribution of household incomes. For comparisons, I will be updating income, homeownership, and educational attainment for the 100 largest metro areas in the country. I will also be updating prime working-age employment rates for metros and states. We will also get updated numbers for a whole host of measures including broadband access, commuting and the like.

Unfortunately we will have to wait until October for the underlying microdata where we can crunch some numbers ourselves and do more in-depth analysis. And for those interested in data for all counties, or smaller geographic areas like block groups, we have to wait until December when the 5 year ACS estimates are released.

Stay tuned for periodic updates here on the site and in our presentations as we unpack this annual data present.

Posted by: Josh Lehner | September 7, 2018

Fun Friday: New Construction Lot Size

The Census Bureau recently released the 2017 Survey of Construction where they look at the characteristics of new construction, both single-family and multifamily. The National Association of Home Builders has dug into the numbers some and highlighted trends for both the lot size and lot values across the country for new single-family construction. In the big picture, the typical lot size has been declining for some time, while lot prices on an inflation-adjusted basis remain steady. However there is a lot of variation underneath these figures, so I thought I’d dive in as well.

First, a NAHB map showing how the typical lot size for new construction varies across the different Census divisions (the lowest level of geography for which data is available). The Pacific Division has the smallest lot size at 0.15 acres which is roughly 6,500 square feet.

Depending upon where you live here in Oregon a 6,500 square foot lot is either pretty big, fairly typical, or even small. For example, the classic single family parcel in the City of Portland is 5,000 square feet, and the most common residential zoning in the City of Bend, and City of Salem call for 4,000 square feet. That said, Beaverton has a lot of 5,000 and 7,000 square foot lots, Medford is primarily 7,000 and 10,000 square foot lots, while Lake Oswego has mostly 7,500, 10,000, and 15,000 square foot lots. Rarely are homes built on larger parcels than these, both due to development codes and the fact that most new construction takes place in urban areas, or on the urban fringe. New construction in rural areas tends to be on larger lots — measured in acres, not tenths of acres — but represents a small share of overall construction activity.

In terms of how big these new homes are and how much they cost, there is somewhat of a pattern based on lot size. Generally speaking, with a larger lot, a bigger home is built, and the sale price is higher as a result. However when it comes to the small and medium-sized lots, there is less variation in the size of homes built and their sale price.

There are quite a few things going on here that we are not able to untangle with this particular data set. In the least charitable description, one could say developers are taking advantage of the smaller lots, building the same sized house and charging the same amount, or more, and thus reaping higher profits. However, these smaller lots tend to be more centrally located within urban areas where land values are higher due to stronger demand. As such, a more likely explanation would be that by spreading the high land costs across more housing units, builders are able to deliver the same sized house for roughly the same price as those built on somewhat larger lots that are likely less centrally locate. In this sense, smaller lot sizes act to help with affordability.

Stay tuned, next week we get a plethora of new Census data on household incomes, poverty, household formation and the like. #CannotWait

Posted by: Josh Lehner | August 29, 2018

Oregon Economic and Revenue Forecast, September 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

While economic growth continues and nearly all leading indicators flash green, the shape of the business cycle may be coming into focus. Specifically, economists are becoming more comfortable talking about plausible recession scenarios given the expected path of federal policy. To be clear, the flow of economic data remains healthy, and the risks to the near-term outlook are balanced, if not tilted toward the upside.

However, potential danger lurks around the corner with many forecasters pointing at the confluence of events beginning in 2020. At this time, federal fiscal policy will be a drag on economic growth and monetary policy is expected to have transitioned from accommodative, to neutral, and potentially even restrictive. Should this fully come to pass, a recession is likely to follow. However, this outcome is not a foregone conclusion. Rather, for really the first time this cycle, it is a reasonable, and clear scenario for how this expansion ends. Even so, between now and then, economic growth is expected to be at or above potential.

Here in Oregon, the economy follows the U.S. business cycle overall, albeit with more volatility. The good news is job gains are enough to match population growth and absorb the workers coming back into the labor market. Wages are rising faster than in the typical state, as are household incomes. That said, growth is slower today than a few years ago. The regional economy continues to transition down to more sustainable rates. Ongoing improvements in these deeper measures of economic well-being are also expected to continue.

Oregon’s economic expansion has largely played out as expected in recent months, yet state revenue collections continue to outpace the forecast.  Much of the strong revenue growth can be traced to temporary factors, including the response of Oregonians to federal tax law changes and a spike in estate tax collections. Together with the fleeting nature of recent tax collections, Oregon’s unique kicker law is acting to mute the budgetary impact of unexpected revenues.  While more revenue is now expected to be collected during the current biennium, less will be available during the 2019-21 budget period.

Although it will take some time for all of the impacts of the federal tax law changes to be known, Oregon’s taxpayers have clearly been responding to the new environment.  Since the federal changes were announced, advanced payments of personal income taxes are up 24% relative to last year.  Advanced corporate tax payments are up more than 50% over the same period.  Although state tax liability has been boosted somewhat in the near term due to the federal reforms, recent payments have been far larger than what could reasonably be expected due to the direct impact of the law changes.  It is likely that collections will cool down going forward as households and businesses reconcile their annual tax bills.

Should the September forecast come to pass, Oregon’s taxpayers will easily trigger both the personal income tax kicker and corporate kicker laws during the 2017-19 biennium. Both kickers — $686 million for personal, $208 million for corporate – would be the largest dollar amounts seem in more than a decade. However, the regional economy and tax liability are bigger today as the state grows. When measured as a share of tax liability, or a share of tax collections, the projected kickers from 2017-19 are smaller than most historical kickers.

The current corporate kicker is largely the result of an expected $245 million in additional revenue as a result of the new federal tax law that requires the repatriation of deferred foreign income. The personal kicker will be paid out as a credit on Oregonian tax returns in April 2020, or right as the economic drags weigh on growth. According to the September forecast, non-corporate General Fund revenues (the personal kicker base) are expected to exceed the Close of Session forecast by 3.7% at the end of the biennium.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | August 27, 2018

Start-Ups, R&D, and Productivity

Right now, even as the economy is hitting the sweet spot, long-run growth expectations remain subdued. This does not mean the economy cannot have a good year or three of growth, let alone a strong quarter or two. However, economic output can be thought of as the number of individuals working, how many hours they work, and how much they produce every hour. The reason why long-run growth is forecasted to be slower than in the past is because these factors are currently growing at very slow rates. And they are expected to continue at slower rates moving forward. See Jason Furman’s summary for an accessible deeper dive into these issues and trends.

Out of these factors, the one that is least understood, and possibly the most likely to differ from forecast is productivity. Economists are increasingly researching and discussing this substantial slowing in productivity, but have yet to reach a clear consensus as to what is driving it. The fact that the slowdown in productivity is worldwide, and not just in a specific country or two further complicates the analysis.

That said, there are a few encouraging signs in terms of new business formation, and research and development spending, that could — I stress could — potentially lay the groundwork for better productivity gains in the future. Another potential factor is the tightening labor market. When workers become more expensive (higher wages), businesses may invest in more equipment and software to offset those costs (replace workers with technology). Should these productivity gains come to fruition, then longer-term economic growth prospects would certainly be raised, and would also allow for more wiggle room for the Fed to navigate through the current danger zone, as Tim Duy recently discussed.

First, new business applications here in Oregon are on the rise. They now exceed the numbers at the peak of the last expansion. The upward trend in the absolute number of new businesses is encouraging, however start-ups are a smaller share of all firms than in the past. These business applications are an imperfect measure. However the good Census data comes with a considerable lag. And the program was revamped not too long ago. New state level data on firm age has not been released in years at this point, so our office is focusing on more timely measures to help gauge recent trends. See our previous report for a more in-depth discussion.

Furthermore, these trends in recent years provide zero guarantee that productivity will actually accelerate. For example, even as spending on R&D recently hit a historic high in terms of the share of GDP, it has been operating in a fairly narrow band in recent decades. While this is true at the top line, there has been a clear shift in R&D as the public sector pulls back – especially following the winding down of the space program and the cold war – and the private sector steps forward. The upward march in private sector R&D is encouraging. Now, what really matters most is the return on or success of this R&D spending, not just whether it happens or not.

The decline in start-ups and in productivity is well-documented, if not well-understood. Stay tuned for a follow-up post in the coming weeks where I will dive a bit more into our office’s expectations on the role of technology, automation, and productivity in the economy. There is quite a bit of chatter, and some genuine concern that there is a coming wave of technological change that will drive up unemployment. In our view, it is not so much about being a techno-optimist, or techno-pessimist, but rather being a techno-realist*.

* Credit for techno-realist goes to Gail Krumenauer, economist with the Oregon Employment Department. I am just borrowing her great phrase and am jealous I didn’t come up with it.

Posted by: Josh Lehner | August 24, 2018

Fun Friday: Strong Oregon Wage Gains

Across the country, wage growth is slowly picking up as the economy strengthens. Both average hourly earnings, and the Employment Cost Index for wages and salaries are now approaching 3% annual growth. This is not great wage growth when we look historically. But, unfortunately, such gains are roughly in-line with inflation plus productivity growth in the economy, and also consistent with other measures of labor market slack like prime-age EPOP. As the labor market continues to improve, expectations are that wages will rise as well.

That said, there are other issues impacting wage gains at the top line, including industry shifts over time and also those flowing into and out of the labor market distorting trends. The ECI, considered a better measure of wages, controls for the industrial shifts. But the flows of more-experienced, and higher-paid Boomers exiting the workforce, and being replaced by less-experienced, and lower-paid workers still weighs on aggregate wage gains. The Atlanta Fed’s Wage Tracker helps correct for this by examining wage growth for those who have been employed over the past year. Their numbers do indicate wages are increasing significantly faster and for a longer period of time, at about 3.5% annually for the past 3-4 years for the typical worker. Even so, the San Francisco Fed’s Wage Rigidity Meter shows the share of workers who received no raise in the past year still remains higher than in the past.

All of the above sets the national stage, and we know Oregon’s wage growth has been considerably stronger then these gains. Average wages in Oregon have generally increased 3-4% annually in recent years. Due to these gains, Oregon’s average wage, while still lower than the nation’s, is at its highest relative point since the mills closed in the 1980s. However, these figures are also based on top line, or aggregate numbers which can mask some trends below the surface.

Thankfully, Damon Runberg, a regional economist with the Oregon Employment Department, recently published some great research on Oregon wages that examines growth at the individual worker level. This is tremendous work and a great use of the wage file they have based on all workers covered by unemployment insurance. What Damon found, with a big wage file assist from Barbara Peniston, is that over the past three years, median hourly wages for the typical worker in Oregon increased a bit more than 3% per year. Remember, national wages are just now approaching 3%, so Oregon really has seen better gains. But what is a really striking finding, is Damon found that among Oregon workers who were continually employed over the entire 3 year period, their wage gains were more than 5% per year.

Now, this pool of workers — those that recorded wages for each of the 12 consecutive quarters — is only about 1 in 4 private sector workers statewide. No question, it is a selective group. They’re not necessarily the lucky 25% or the best or most productive 25% of workers — we all know people who keep their job even though we don’t think they’re particularly good at it. But for those workers who are able to gain work experience, they are seeing significantly stronger wage growth than the top line data show. And Damon went back to a few different historical periods and found that today’s gains are stronger than during the housing boom, and stronger than those seen during the aftermath of the Great Recession.

Another striking finding is that about 75% of Oregon workers are not continually employed over a multi-year stretch. Maybe a worker missed a quarter due to seasonal work, bad weather, illness, or the like. However migration into and out of Oregon, in addition to general labor market churn account for most of this figure. In fact, about 1 out of every 8 workers in Oregon are either gaining or losing a job every single quarter. That level of underlying churn is both higher than most people I talk with realize, and lower than it has been in the past. Furthermore, if all workers are seeing wage gains of about 3% and those that are continually employed are north of 5%, it means median hourly wages for Oregon workers who are not continually employed have increased about 2.5% annually in recent years. Not great, but certainly faster than nationwide trends given top line national numbers are in the 2.5% range.

Do read the whole article as Damon walks you through the research and many different aspects and results, including the fact that the wage gains are strongest (in percentage terms) for the lowest paid workers, and there is a premium for workers who switch firms or industries as competitors have to bid up wages in order to hire away workers from other companies. This is why economists track the quits rate, as it measures worker confidence and also has implications for wage gains.

Posted by: Josh Lehner | August 21, 2018

Gorge Discussions Pt 2: Tech

A few weeks ago our office and the Governor’s Council of Economic Advisors had our annual off-site meeting where we get out of Salem and into a regional economy to learn more about what’s going on. This year we were in Hood River where we had one panel discussion on housing and another on tech (the unmanned aerial systems cluster), in addition to two business tours. What follows is Part 2 of the discussions. All errors in terms of relaying information, or interpreting comments are mine.

First, I wanted to give a massive thank you to Nate Stice of the Regional Solutions Team, and Carolyn Meece from Business Oregon for arranging the panels and business tours for our group. It was a great day due to the groundwork they did for us. Thank you!

The second panel of the day focused on gorge technology, and consisted of Greg Davis of Overwatch, Ross Hoag of Power4Flight, Tammy Kaufmann of Insitu, and Kevin Below of Orbital UAV.

As with many thriving clusters that began with a start-up company or two, part of the magic is a combination of happenstance and intentional efforts by the original founders to work on a product in a location they wanted to live in. The gorge unmanned aerial systems cluster is no different. Ross, who was either employee #3 or #4 at Insitsu back in the early- and mid-1990s, told the story of how they wanted to live in a beautiful area and work on these systems. They were fiddling with small aircraft out of an old school bus in the area. While such intriguing stories are part of the lore, the unique part is that this effort succeeded.

Today, the panelists estimated, that the gorge is home to more than a dozen firms that employ around 1,500 workers in the region, which straddles the Columbia and state lines. The panelists discussed how they do have local supply chains. And being next door to the Portland region provided many resources as well, including the airport for both travel and shipping, professional/legal services, manufacturers, and so forth. However, this success was far from a foregone conclusion 25 years ago. First, the ideas and products had to be successful, of course. But a cluster of firms takes more than that. And, according to the discussion, there were noncompete clauses 10-20 years ago that prevented workers from spinning off their ideas into new companies, and also prevented suppliers from working with similar (i.e. competing) firms, and the like. As those noncompetes were eliminated, the broader cluster took off. For example, Kevin talked about how Orbital UAV, an Australian company, chose to locate in the gorge due to the existing companies and workforce. Success begets success.

The gorge regional economy is certainly successful overall. In fact, the gorge is among the fastest growing rural economies in the nation in addition to being among the most highly-educated rural economies in the nation. And as discussed the other week, it is also among the least affordable areas too.

After this overview of the UAS cluster and the region, the discussion turned toward two things: whether or not this successful is replicable in other areas, and also what issues or barriers to growth the region faces.

We will start with the issues and barriers to growth. At the top of everybody’s list was housing; not just affordability, but also availability as inventory and vacancies are low. Housing is part of these businesses’ recruitment efforts. They have had employees accept jobs and then leave because they were unable to find suitable housing. Similarly, finding work for spouses and partners can be more challenging in a smaller region than in a large metro. Commuting into the gorge for work is somewhat common, as is remote work. Tammy discussed how Insitsu has an office in Vancouver, WA and runs a bus from Vancouver to Bingen, then across the river to Hood River and back every day (maybe multiple times a day? I cannot remember).

Greg mentioned how his growing company is running into issues finding more office space. Also good internet access is at least an issue, if not a barrier. [These are part of the supply constraints our office has been highlighting, and included in our Rural Oregon report too.] None of the firms said they are actively looking to leave the region, but that growth is becoming more challenging and finding space or housing is a growing share of their daily activities, taking them away from their core products and services. Finally, another regional issue both panels mentioned was the need for the bridge across the Columbia to be replaced. That link is vital not just for the UAS cluster, but also for residents, and also as a transportation route, especially when parts of I-84 of SR14 are shut down due to weather, or wildfires as they were last year.

In terms of the UAS success being replicable, the answer is likely no. The specifics of the individuals involved, the industry they were creating and the like are just that, they are very specific. However that does not mean all hope is lost. From our office’s vantage point, and most of advisors as well, it is less about the specific industry and more about the foundation upon which the success was built. Having a good workforce, infrastructure, planning, and taxing system in place, in addition to being able to provide information and contacts for firms looking for assistance is critical. These pieces of the foundation are the natural fit for the role of the public sector. It is really hard to pick winners and losers, but providing the platform from which any type of business can succeed is the goal.

Finally, after lunch the Governor’s Council toured both Cardinal Glass’s plant just outside of town where they assemble windows for the Pacific Northwest, and also pFriem Family Brewers. It was a rough way to end the day, down there on the river at a brewery, but somebody had to do it.

Posted by: Josh Lehner | August 8, 2018

Wildfires: A Preliminary Economic Assessment

In the midst of another severe wildfire season, lets take a look at some of the potential channels in which economic problems may materialize in the future. This preliminary assessment is something our office put together a year ago and was originally published in our December 2017 forecast document but never here on the blog. The summary and concerns very much apply to this year as well, although the names of the fires need to be updated. In terms of the general process of economic recovery from natural disasters, see our previous post.

First, however, a quick look at the location of wildfires and the air quality around the state. The air quality in the Rogue Valley and Klamath Basin is unhealthy both due to local fires and smoke blowing in from the Mendocino complex fire in northern California. With local fires burning in southern Oregon, the Gorge, and in eastern Oregon, much of these areas have moderate air quality (yellow). Finally, with no local fires and favorable winds, much of the coast and the Willamette Valley still has healthy air quality.

From a long-term perspective, the scariest potential impact of Oregon’s 2017 [and 2018] wildfire season is that fewer households and investments may be attracted to the region moving forward. Oregon’s primary comparative advantage remains its ability to draw skilled workers away from other states. To the extent that local quality of life has been reduced, or if Oregon is perceived as a riskier or costlier place to live and do business, this advantage will be less pronounced. Our office’s long-run economic outlook would need to be lowered, if this were true.

Increased risk lowers growth prospects. If investors and households view Oregon as a riskier place, businesses, property owners, and governments will face higher costs moving forward. While it is still early given wildfire season ended not too long ago, interest rates spreads between Oregon’s municipal bonds and bonds in other states have not widened. However this may not only reflect a stable Oregon outlook, but also heightened risk in other states following a severe hurricane season.

In terms of the lost forests, how valuable are they? The market value of timber is a natural place to start. However for a place that was never going to be logged, like the Gorge scenic area, log prices are largely irrelevant. That said, when damages are argued and assessed through the legal system, like the 2007 Moonlight Fire in northern California, the end result tends to be the replacement value of the lost land/timber. [For the lost cropland in the Gorge in 2018 it is a bit different. For the lost wheat that was just about to be harvested, farmers should receive a partial reimbursement from crop insurance. For the lost pastures I am not sure what happens.]

The [2017] transportation disruptions due to the wildfires did bring significant costs, although they were temporary. Westbound lanes of I-84 were closed for 8 days in the Gorge, and eastbound lanes for 19 days. Economists at the Oregon Department of Transportation estimated the daily costs to trucking firms due to higher operating costs and payroll to be $250,000 to $290,000 per day. Passenger traffic was diverted to Washington SR14. Rail traffic disruptions were similarly modest. Union Pacific noted that tracks were shut down for four days, with customers experienced up to 48 hour delays on shipments.

Assessing the net impact on Oregon businesses is difficult. While areas in the Gorge were shut down, other areas benefited from the diverted traffic. In particular, retailers on WA14, OR35 and OR216 reported increased traffic and consumer demand. However the fact that some areas temporarily benefited comes as little consolation to many businesses that may have suffered permanent damage. Small businesses that were negatively hit by closures, particularly during their peak season when winter reserves are accumulated, will bear watching and could require public help over the next couple of years. In particular, access to capital is difficult for many small businesses. Cash flow issues for some may start to show up over the winter, and for others down the road when they face a major expense. In terms of specific industries, hospitality firms and retailers are the most likely to see the impacts. Agriculture firms and manufacturers were less likely to be impacted, however they did see increased shipping costs and/or delays. Additionally, many service firms that depend upon local customers were also likely spared long-term losses, even as they experienced a quiet few weeks.

As the Oregon Employment Department has been tracking, the impact of the fires on direct employment is minimal based on the initial, preliminary data available today. As more complete data becomes available, impacts are more likely to be seen in hours worked per employee, and wages, rather than whether an individual has a job or not.

For Oregon overall and the impacted regional economies within the state, the concern is slower growth moving forward as tourists, investments, and new firms or residents avoid the impacted areas. As such, looking for historical precedents may help to understand what Oregon has in store moving forward.

First, the Yellowstone fires of 1988 are a notorious example of a major fire event in a federally-owned tourist area. Surprisingly, looking at visitation to Yellowstone and the other major and popular national parks, there does not seem to be a noticeable impact outside of the year of the fires. Tourism and visitors returned the following year, and the year after, and the year after.

Yellowstone is huge. There are lots of trees, meadows, wildlife and the like. Just like the Gorge is big. There are myriad trails, waterfalls, and outdoor opportunities for people to enjoy right now and certainly next year. Concerns in Ashland and possibly Brookings are more problematic. If cancellations of Shakespeare plays becomes a reoccurring pattern, year over year that could hurt attendance over an extended period of time. For Brookings and surrounding areas that were impacted by the Chetco Bar fire, there could be larger local impacts to the extent it represents a smaller geographic area with fewer opportunities (potentially).

Second, tourism around Mt. Saint Helens exhibited a similarly quick rebound following the eruption in 1980. Hotel occupancy one month after the eruption was down 15% in Portland relative to the previous year. Declines in areas with more ash problems like Spokane (-26%) and Yakima (-64%) were even more pronounced. However much of this decline could also be traced to high gas prices and the onset of a nationwide recession. That said, the eruption soon turned into a tourism asset. By August of 1980, just months after the eruption, U.S. Forest Service observation booths were welcoming 4,000 visitors per day.

Finally, there was a great deal of concern that heightened risks following the Mt. Saint Helens eruption would curb long-term regional economic activity. This is exactly the concerns today as well. The analysis performed at that time is somewhat comforting, even amusing, given the benefit of hindsight. As the report says, a lot of the Portland area economic growth were in newer, “footloose” industries like electrical equipment, instrument, machinery, and transportation equipment manufacturing. These sectors located in the Portland area for “reasons other than accessibility to the local market or local natural resources. Instead most [located] for … high quality of life, including a clean environment and easy access to abundant recreational facilities.”

Posted by: Josh Lehner | August 3, 2018

The Pacific Northwest in Expansion

Recently I gave a broader, regional outlook talk that included many attendees who were either from Washington or had clients or offices north of the border.

Overall there is not a massive difference between the states in terms of where they are in the business cycle, the risks to the outlook, and the like. Our office’s counterparts, the Washington Economic and Revenue Forecast Council, have the same general flavor in their forecasts, namely slowing economic, revenue, and population growth as the economy transitions down to more sustainable rates. Their labor market is similarly tight due to both the cycle and booming retirements.

There are differences in the specifics however. Washington is more exposed to the trade fisticuffs. E-commerce has grown more briskly (obviously). Washington’s prime-age EPOP is improving but remains lower than in Oregon and the US. Their population’s natural increase is shrinking but holding up better due to a significantly higher birth rate than in Oregon. (Although I suspect revisions to Washington’s population forecasts will incorporate a little lower births and higher deaths. But still a much higher birthrate than here in Oregon.) And Washington, or at least the Seattle MSA has been able to add more housing supply relative to population growth than has Oregon and the Portland MSA.

What did stand out to me in preparing for the talk was that all of the Northwest is expanding. And all of the region’s urban areas are at record employment levels. Tri Cities leads the pack, but Bend is close behind, showing both the largest employment losses in recession and the strongest growth since. And while Eugene and Grants Pass may be at the bottom of this chart, that is mostly about how far they fell in recession. Growth since the downturn is significantly faster than a handful of other PNW metros.

Now, the above focuses on urban or metro areas. We do see some differences when looking across the PNW rural counties. Like Oregon, Washington’s rural employment trends fall into two big categories. Instead of the north-south divide Oregon has in terms of economic growth this cycle, Washington sees an east-west divide. Jobs in Oregon’s northern rural counties and in Washington’s eastern rural counties are at historic highs. The same cannot be said for Oregon’s southern rural counties and Washington’s western rural counties. While I did not do a full decomposition to figure out what exactly is driving these trends, we do know one common variable across both regions is their historic strength in timber. While the sector is growing again, it does remain significantly smaller than prior to the recession, let alone 40 years ago.

Finally, there was a recent internet listicle that ranked both Grants Pass and Bellingham as among the 5 worst job markets across the country. That surprised me and seemed a bit harsh, so I went and pulled a handful of labor market indicators to see how true this may be. No doubt if you look at the relatively high unemployment rates (compared with all other metros, not compared with where unemployment rates have been historically), low average wages, and low prime-age employment rates, these metros do rank low across the country. However, that listicle also said they incorporated not just these snapshot rankings but also rankings of growth and improvement. Here, you can see that both Grants Pass and Bellingham are growing strongly in recent years. Job growth is picking up and above average, which drives the unemployment rate down at the same time, everything else equal. And while both metros have low average wages, their growth over the entire business cycle is among the best nationwide. None of this is to say Grants Pass and Bellingham are the best labor markets in the nation, but in digging into these various measures, I also have a hard time saying they’re the worst.

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